Powell Confirms “Time has come for policy to adjust.”

Fed Chair Jerome Powell spoke at the Jackson Hole Economic Symposium on Friday.  His speech was definitely dovish as he confirmed a September 18 rate cut.  Powell said, “the time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

While he was non-committal on the size of a cut, the market liked the confirmation that policy is changing and will begin to be less restrictive.  Powell explained that inflation has declined significantly, and his confidence has grown that inflation is headed on a path to 2%.  He also said that upside risks to inflation have diminished, while downside risks to unemployment have increased. Clearly, the Fed is more concerned with the labor market versus inflation now.

On the labor market, Powell said that conditions are less tight than pre-pandemic when inflation was below 2%, meaning that the labor market would not be a source of inflation.

What’s the bottom line? The Fed Futures continues to price in a 100% change of a 25bp cut in September, with a 33% chance of 50bp.  The market is putting a 73% chance of 100bp of cuts by year end, which would mean there has to be a 50bp cut at one of the next three meetings.  The market is also pricing in another 125bp of cuts in 2025, which would be 225bp in total between this year and next and bring the Fed Funds rate down to 3.125%, which would still be above inflation.